AOL VOIP: You've Got Apathy

The launch draws mixed reaction from analysts as most see VOIP as an 'interesting' add-on

April 7, 2005

4 Min Read
AOL VOIP: You've Got Apathy

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 Researchanalyst 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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