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Does VOIP Business Add Up?

Light Reading
News Analysis
Light Reading
5/11/2005
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Recent VOIP market forecasts predict a sharp spike in residential VOIP users during the next few years. At the same time there is no shortage of consumer VOIP providers; and the revenues generated in the space aren’t likely to support all of them.

“I definitely think we’re going to see some disruption in the smaller, bring-your-own-access space,” says Katie Griffin, VOIP analyst at The Yankee Group. “There were a lot of people who jumped in -- I think the barriers to entry were pretty low -- but I think a lot of them are now running after shrinking dollars.”

The actual number of residential VOIP providers in North America remains unclear, but an average of analyst estimates puts it at about 400. One empirical measurement was taken recently by broadband management equipment company Sandvine. It counted traffic from 1,100 VOIP providers on its customers' networks as of April 5th, but many of those were not residential providers, a spokesperson says (see Sandvine Counts 1,100 VOIP SPs).

VOIP providers include RBOCs and ILECs, ISPs and cable companies, as well as numerous “pure-play” VOIP providers like Skype Technologies SA and Vonage Holdings Corp. In all categories, the providers range in size from the tiniest ISP to telecom giants SBC Communications Inc. (NYSE: SBC) and Verizon Communications Inc. (NYSE: VZ).

Infonetics Research Inc. estimates that residential VOIP players reaped a combined $260 million in revenues during 2004, and that subscribers numbered 1.1 million at the end of the year (see Report: VOIP Adoption on Track).

Assuming for a moment that each of those 1.1 million VOIP subscribers paid comparable rates, the average revenue each one would have yielded is $233 ($256 million in revenues divided by 1.1 million subscribers), or roughly $20 per month.

Of course, VOIP providers are not all created equal. The largest players in 2004 were Vonage, which reported 390,000 subscribers at the end of the year, and cable players Time Warner Cable, Cox Communications Inc. (NYSE: COX), and Cablevision Systems Corp. (NYSE: CVC), which combined had roughly 600,000 VOIP customers (see Vonage Raises $200M and VOIP Keeps Fueling Cable Growth). If those four players are removed, only 110,000 subscribers remain and the revenue pool shrinks to $25.6 million.

If each of the remaining 397 providers gets an equal share (297 subscribers apiece), and each of those subscribers contributed the 2004 average per-subscriber VOIP revenue ($233), then each VOIP provider makes $70,253 for the full year. Better not file the IPO papers yet.

Many VOIP providers, of course, are banking on a fast ramp-up in residential VOIP subscribers projected for 2005; and the research shows it is coming. IDC said in an April 4th report that North American residential subscribers will grow from 3 million by the end of this year to 27 million by the end of 2009, while Infonetics Research said the number will grow to 20.8 million in 2008 in its May 5 report (see IDC Predicts Broadband Voice Growth and Report: VOIP Adoption on Track).

But increasingly it will be large, entrenched players with pre-existing customer relationships and solid brand awareness that will take most of the new customers, analysts say (see AOL VOIP: You've Got Apathy). Service bundling is also likely to be a key differentiator (see VOIP Parasites Take Heart). Industry research finds that consumers are attracted to VOIP as part of a bundle that saves them money on individual services. Cox Cable, for example, reports that 44 percent of its customer base had subscribed to two or more services at the end of 2004 (see Dittberner Reports on Cable Telephony Gear).

“Cost savings, ease of use, and bundling with existing services are the drivers that will make a difference in consumer VOIP adoption in the long term,” says analyst Gabriel Brown in the Light Reading Insider report Residential VOIP Services Explosion.

Others may find their place in the world by substituting the triple-play and bundling with pure marketing force, but it won't be easy (see Citron: Triple Play Is Tripe).

“Pure-play providers such as Vonage, 8x8, and Skype must strike quickly to gain customers to have any hope of long-term survival,” Brown says. “Vonage has perhaps taken this to heart more than the others, saying it will spend $75 million on marketing and advertising in 2005.”

But it’s likely to be a tough road ahead for smaller residential VOIP players.

“Smaller VOIP players have to be able to leverage some existing asset, like a customer base or a network, or else they’re really swimming upstream,” the Yankee Group’s Griffin says.

— Mark Sullivan, Reporter, Light Reading

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materialgirl
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materialgirl,
User Rank: Light Beer
12/5/2012 | 3:15:35 AM
re: Does VOIP Business Add Up?
Since VoIP is the way 100% of voice communication will be done in 3-5 years, it seems to make more sense to treat it as a transition rather than some exotic new product. It makes more sense to just to a graph of all voice lines and mobile users in a geography, then chart how fast they transition.

The numbers also seem low, since Skype already has 109M users according to their web site.
rjmcmahon
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rjmcmahon,
User Rank: Light Beer
12/5/2012 | 3:15:35 AM
re: Does VOIP Business Add Up?
Good article. Thanks for publishing it.

A security company offering VoIP could be convenient for a small business owner. Unfortunately, an ADT web site suggests there is a problem. Can anybody comment?

http://www.adt.ca/en/about/res...

>Voice Over Internet Protocol G How It May Affect Your Security System.

Voice Over Internet ProtocolVoice Over Internet Protocol (VoIP) is becoming a popular telecom service in Canada and is now being offered in most main urban centres across the country. Briefly, VoIP allows consumers to obtain phone service over the Internet while still using conventional telephone sets.

When this service is installed to obtain an additional line at your home or business and is not being connected to the inside wiring of your existing telephone outlets, the communication of alarm signals from your premises to the monitoring station should not be affected.

However, if you intend to subscribe to VoIP as a replacement for your standard telephone service, please be aware that your security system's communication with the Central Monitoring Centre will be compromised. It is for this reason that, ADT does not recommend or support VoIP for use with your security systems at this time.
rjmcmahon
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rjmcmahon,
User Rank: Light Beer
12/5/2012 | 3:15:34 AM
re: Does VOIP Business Add Up?
it seems to make more sense to treat VoIP as a transition rather than some exotic new product.

I think we treat VoIP as just another application.

The exotic new product may be a financial one. People will need to take an ownership position into the new and modern optical facilities. Something like golf club memberships where participants pay into the system in which they belong might do the trick. (Maybe ask the people who created 529s and see what they can come up with?) http://www.independent529plan....
fgoldstein
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fgoldstein,
User Rank: Light Sabre
12/5/2012 | 3:15:33 AM
re: Does VOIP Business Add Up?
The question does not concern VoIP technology in general -- it's usually hard enough to make work worth a hoot'n'holler -- but the business model. The question is not office PBXs, interoffice trunks, or voice mail. The question is the "VoIP Business", specifically the parasitic service providers of whom Vonage is the market leader. This is not a hard business to enter. Thus there are a lot of competitors, with lots of price pressure on all of them.

The parasitic business model is inherently limited for the time being. It depends upon the subscriber having either DSL, which is usually bundled with a phone line to begin with, or a cable modem. In the latter case, the cable companies are rolling out PacketCable, which technically is a form of VoIP but which works better than a parasitic service, and is usually supported like a POTS line by the cable company. Little things like E911 usually work, and the voice doesn't drop out when you or your daughter press the "send" button on an email.

So the parasitics are left basically selling a cheap LD service to techno-geeks and k1Dz who think it's "k3wl" and who imagine that somehow they're stiffing "the phone company". This gets them a few million collective subscribers, but runs out of steam.

The interesting thing to watch will be whether the FCC reforms the way the real phone industry works, so that it doesn't have all of the cross-subsidies and opportunities for arbitrage that it now has. Powell used the existence of Vonage as an excuse for ignoring the law that allows CLECs to compete with ILECs. But the old idea of LD usage subsidizing everything else, including overpriced ILEC data lines to schools, is obsolete. Vonage refused to play; it's time for that rule to be changed.
Kevin Mitchell
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Kevin Mitchell,
User Rank: Light Beer
12/5/2012 | 3:15:33 AM
re: Does VOIP Business Add Up?
MG,

Yes, they would be low if Skype is included, but they aren't really in the same league as the rest. I assume the IDC and Infonetics numbers exclude Skype, but include Vonage, Comcast, AT&T, etc.
Kevin Mitchell
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Kevin Mitchell,
User Rank: Light Beer
12/5/2012 | 3:15:32 AM
re: Does VOIP Business Add Up?
Mark,

Nice article, although the calculation of total 12 months of revenue (moving picture) divided by end of year subscirbers (snapshot) is misleading. There is no perfect way unless you havd monthly figures. Another calculation is to take the average of the start of year subs and end of year subs and divide that figure by 12-month revenue or create a weighting scheme based on which half of the year brough in more revenue.
BigBrother
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BigBrother,
User Rank: Light Beer
12/5/2012 | 3:15:32 AM
re: Does VOIP Business Add Up?
I think the alarm box connect to a telephone line that is also connect to some equipment outside your home, so that they can detect when your line is cut, alarm is sent to the central. If you use VOIP, that line is not there anymore.
voyce_overipee
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voyce_overipee,
User Rank: Light Beer
12/5/2012 | 3:15:32 AM
re: Does VOIP Business Add Up?
I think the alarm box connect to a telephone line that is also connect to some equipment outside your home, so that they can detect when your line is cut, alarm is sent to the central. If you use VOIP, that line is not there anymore.

I dout that very much. Thy didnt do that for my ADT, and it doesn't even make sense unless yo mean the my phone provider is actualy involved hardware-wise, which they aren't as far as i know. I assumed the reason was the alarm box essentaly uses a modem to talk to the security company (when an alarm goes off), and so any codec compression would break it. so if fax works through it alarm would. but someone else told me the alarm box actually sends tones (like dtmf, but maybe not actualy dtmf) after call connect, and so compression could break that or the ATA's DSPs could possibly interfere with the tones even for 711.
paolo.franzoi
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paolo.franzoi,
User Rank: Light Beer
12/5/2012 | 3:15:31 AM
re: Does VOIP Business Add Up?

There are absolutely alarm systems that look for physical connectivity to the home over the phone network. Having worked on OSP issues and having them go off when you have connection problems, it is a big deal. As are the other non-POTS voice line services.

seven
geoffrey.langlois@tdstelecom.c
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geoffrey.langlois@tdstelecom.c,
User Rank: Light Beer
12/5/2012 | 3:15:31 AM
re: Does VOIP Business Add Up?
There is the modem/tone issue. The central monitoring systems needs to learn, for example, which type of alarm and zone within the area has been tripped.

There's also the DID issue - the central station may use your public direct dial telephone number to identify the calling location. (Yes, Jason, I know CLID can be spoofed if you word hard enough.) When your Internet telephony number is in Phoenix and you're in Cleveland, it can become a bit confusing ...
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