Optical/IP Networks

AOL Ambles Into VOIP

America Online is beta-testing a nationwide VOIP service, due to debut in 2005, according to user posts on Broadband Reports and other message boards. The service is "powered by" Level 3 Communications Inc. (Nasdaq: LVLT), which also offers wholesale residential VOIP services to Skype Technologies SA and other companies.

While consumers help iron out its VOIP offering, AOL, the Internet division of Time Warner Inc. (NYSE: TWX), is also hiring an executive to become Director of VOIP Products and Services, according to an industry job listing site. That person "will be the primary advocate for the product within AOL and its partners and is ultimately responsible for product delivery."

That job apparently can't be filled soon enough, as AOL's efforts are already getting ripped. One message poster from Brooklyn said he was accepted as an AOL VOIP beta tester in late July and posted an email confirming that his VOIP kit was on the way. On August 28, he reports, he still had not received the kit. "If AOL is this lax about sending out kits, I can imagine how they are with providing CS [customer service] for the VOIP," he writes.

AOL's foray into VOIP confirms what Vonage Holdings Corp. and others have already acknowledged about the space: Marketing, branding, and price will be among the key differentiators of consumer VOIP providers. Customer service figures in there somewhere, but that hardly seems to throw the early adopters.

Even the incumbent carriers acknowledge that consumers are mainly worried about their pocketbooks when it comes to shopping for phone service. "Customers don't care about how they get their voice services; they care about price," says Wes Warnock, a spokesman for SBC Communications Inc. (NYSE: SBC). "They care about pricing and quality, and, on that footing, we're competitive."

SBC, too, acknowledges that it will someday have a consumer VOIP offering. For now, though, VOIP is "a niche service with consumers," according to Warnock.

Consumer VOIP, in fact, has become a commodity before it even debuts in most markets. There are some bold predictions as to its eventual reach; The Yankee Group says VOIP will reach 17.5 million households by 2008. But analysts also warn that the price slashing and ad wars will reduce the service's profit margins quickly, in much the same way that dialup Internet service went from being a techie curiosity to being completely taken for granted.

In a May 2004 survey conducted by Heavy Reading, voice over IP garnered the most support from respondents as the most important new service in 2004, with triple-play coming in a close second.

What a consumer VOIP service does, however, is give the provider -- be it a phone company, cable MSO, or ISP -- something else to sell on top of the basic data connection. "Best-effort data services have quickly become commoditized and today generate only cash, not profits," writes Heavy Reading analyst Scott Clavenna, in his report, "Telco Triple Play: The DSL Imperative."

AOL, which primarily offers online content and email, needs some glue to hold onto its customers. "AOL has 4 million broadband subscribers, -- they are losing some of their subscribers, so they need something more to offer them," says Lindsay Schroth, senior analyst at The Yankee Group.

Other consumer Internet brands will likely follow AOL into the VOIP space.

Yahoo Inc. (Nasdaq: YHOO) offers a VOIP service in Japan through its Yahoo! BB broadband service, which is provided by Softbank BB Corp. Yahoo says that Yahoo! BB reached more than 3.7 million broadband VOIP subscribers in February 2004, less than two years after its VOIP service was introduced.

In the U.S., though, Yahoo's VOIP capability is more limited. Yahoo! Messenger offers voice chat which allows users to talk from PC to PC or from PC to phone!

Google! wouldn't return calls to discuss VOIP services. AOL! didn't respond to calls for comment, either!

As more providers begin pitching VOIP to the consumer market, analysts bet that those providers with the largest customer base in related businesses -- broadband subscribers, search engine users, PC buyers, etc. -- are most poised to succeed.

"The VOIP service needs to be very easy to use, and providers need to touch a lot of people," says Rob Enderle, principal of the Enderle Group, a technology consultancy. Even with 4 million broadband users -- slightly fewer than SBC's 4.3 million DSL users -- its not clear AOL has that reach, he says. "AOL has to communicate the costs benefits of using this service as well."

— Joanna Sabatini, Reporter!, and Phil Harvey, News Editor!, Light Reading

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