Voice-over-IP service provider upstarts stand little hope of making inroads into Europe's consumer broadband market without being able to offer the access service as well, according to telecom consultancy Analysys (see Report: B'band VOIP is a Niche).

Despite the continuing strong growth of broadband penetration, the consultancy believes the European consumer market will not be fertile ground for the likes of Vonage Holdings Corp., and that it makes little commercial sense to offer voice-over-broadband services unless it is bundled with a high-speed access service.

Analysys predicts there will be 6.2 million users of voice-over-broadband services in the major Western European markets (France, Germany, Italy, Spain, Sweden, and the U.K.) in 2007 generating revenues of €1.3 billion. This will account for just 3 percent of the total voice market, with the greatest impact coming in the small business market. "The threat to mainstream voice is not apocalyptic," concludes principal analyst Rupert Wood.

The business case is particularly weak for "indirect" service providers that offer a service over another provider's broadband connection, says Wood. He says new entrants with this model will face massive customer acquisition costs, voice termination fees, and the prospect of having to offer the VOIP service at a very low price because of the existing inexpensive fixed-calls market in Europe. He cites Sweden's Digisip AB as an example of such a VOIP provider that has had "little impact on the market." [Ed. note: In fact, its Website seems to be down.]

This conflicts with Digisip's own projections for rampant growth in the near future. Last year, CEO Hans Eriksson predicted a 10- to 30-fold increase in traffic in the next three years.

Still, Woods adds that broadband penetration will not continue to rise at the current fast pace, with Analysys believing the market will reach saturation point once fewer than 40 percent of Western European households have a broadband connection. This leaves the indirect players with only part of the overall voice market to target, and only a limited portion of these customers will be interested in taking a VOIP service from an alternative provider, reckons Wood.

This puts Europe's national infrastructure owners, the incumbents such as BT Group plc (NYSE: BTY; London: BTA)and Deutsche Telekom AG (NYSE: DT), in the driver's seat, and these are the very companies that have a vested interest in minimizing the impact of VOIP on the voice market.

That won't stop those incumbents from launching services, though, "especially if it spoils the launch of a new entrant," says Wood. "Offense can sometimes be the best form of defense."

So with Vonage poised to launch in the U.K. in the coming months, BT's recent announcement of a residential broadband VOIP service, something it intends to replicate for the small business market, could be construed as a spoiling tactic (see BT Does VOIP – With Strings Attached).

Wood, though, says the likes of BT need to be careful about making VOIP look too attractive. Incumbents with legacy voice revenues to protect need to be careful about how much they are "legitimizing VOIP" and making "an extremely niche service more visible."

And while there's little chance of these indirect players making much impact on the market, there is greater potential for disruption to the voice market status quo from the likes of Skype, which Woods describes as a "DIY VOIP" player.

— Ray Le Maistre, International Editor, Boardwatch