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 likeSkype 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