Analyst firm says VOIP's a winner, but the bulk of the market won't likely flow to new-age providers like Vonage, 8x8

August 30, 2004

3 Min Read
Report: VOIP Growth Won't Benefit All

Projections from The Yankee Group show a mushrooming of residential VOIP business. But here's the bigger question: Who is going to get that business?

Percentage-wise, the numbers are a throwback to the dotcom days, with the U.S. residential VOIP market growing 100 times by 2008, writes Yankee Group analyst Kate Griffin in a report released today. That equates to 17.5 million households, compared with a scant 131,000 last year (see Yankee Says VOIP to Grow 100x).

But that doesn't spell good news for the smaller CLECs (competitive local exchange carriers) chasing this market. Another recent report from Griffin -- "Fighting Goliath: Can Alternative VOIP Providers Survive?" -- predicts the VOIP kingdom will be ruled by traditional phone carriers and cable MSOs, which have bigger funding stashes and the advantage of last-mile access to homes.

In fact, Yankee predictions show the shift is already on:

Table 1: US Local VOIP Market: Percentage of Subscribers



Alternative carriers









Source: The Yankee Group

VOIP was supposed to be the new hope of the CLECs, with the market ruled by small players such as 8x8 Inc. (Nasdaq: EGHT), Net2Phone Inc. (Nasdaq: NTOP), and most prominently Vonage Holdings Corp. These companies are well known among VOIP enthusiasts, but when it comes to the mainstream market, they lack the deep pockets the and brand-name recognition of the big players. Vonage hopes to counter both factors with a recent funding round (see Vonage Dials Up $105M ).

But $100 million is peanuts next to the war chests of the ILECs and cable MSOs, even in bad times. AT&T Corp. (NYSE: T) went on the offensive this year, pouring marketing funds into CallVantage and placing the product at Vonage's resellers, Best Buy and "If this investment by Vonage and AT&T continues, [AT&T] will overpower the smaller players," Griffin wrote in the "Goliath" report, which was released before Vonage's funding announcement.

Vonage's U.S. residential market share, in particular, has dropped to 41 percent, or 156,000 households, from 61 percent last year, Griffin writes. In a way, the company has itself to blame: "Vonage's obvious success has woken the sleeping giants: MSOs, RBOCs, and IXCs that had stood on the VOIP market sidelines are now lining up to jump into the market," she writes.

Another factor to consider is that VOIP carries a low barrier to entry. That could lead to a kind of mutually assured destruction, as a plethora of startups join the space, most of them competing on price -- and annihilating one another in the resulting price war.

Griffin's conclusion is that alternative VOIP providers have to "avoid the gold rush" and "be realistic about the size of their total addressible market." They'll also have to find competitive levers beyond price, she notes.

One possible out for small carriers has been to resell VOIP services to the cable MSOs, but at least one analyst is beginning to question that model (see Net2Phone Out2Dry?).

— Craig Matsumoto, Senior Editor, Light Reading

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For further education, visit the archives of related Light Reading Webinars:

  • Carrier VOIP: How to Build Reliable Networks

  • Key VOIP Migration Strategies and Tactics for Service Providers

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