Grappling with VoIP: the technology has grabbed a tiny toehold in the voice market, but it's on every carrier's radar. A worldwide telco voice battle looms

America's Network, Jan 15, 2005 by Robert Clark

Is this the year of voice over IP, or the year of hype over voice over IP? A slew of major carriers has entered the consumer retail VoIP arena, while challengers like Skype and Vonage continue to rack up impressive numbers. VoIP is taking serious headlines and mindshare. And it's clearly a direct threat to incumbent carriers around the world.

"Almost every service provider I am speaking to is thinking about some sort of transformation," says David Caspari, vice-president of Cisco's Asia-Pacific service provider operations.

"If the incumbents don't develop a product--in this case, VoIP--to cannibalize their own base, then their rivals will come in and attack their base," adds Darren Day, Asia-Pacific director of marketing for MCI.

"There's no doubt in the consumer market it's one of the most talked-about subjects," says senior Ovum analyst Mark Main. He estimates the number of worldwide consumer VoIP users represents a "very small penetration" of the total voice market, about 1% to 2%.

But development of consumer VoIP has been very market-specific, Main notes. VoIP has become a major service in Japan, which leads the world with more than 9 million customers, because of the high-cost of IDD calls. Both Yahoo! BB and NTT Communications now each have more than 4 million VoIP customers, offering calls around the world for just a few cents a minute.

Free Telecom in France is bundling VoIP with multi-channel TV, a response to the poor level of choice in the TV market, says Main. By contrast, the UK has low IDD prices, a wide choice of TV channels and only 10,000 or so VoIP customers.

In the United States, several major cable companies such as Time Warner, Comcast and Cablevision are marketing VoIP as part of a discounted voice, data and video service bundle.

"There's not a lot of money to be made from any kind of telephone service these days," Main says. "It's not a huge money-spinner."

So we are still fairly early in the technology adoption cycle of VoIP, despite the great leap of the past 12 months. But every carrier has marked the VoIP and NGN transformation onto its roadmap, says Caspari.

"When you look at the business case, purely on cost regime, and reducing opex, operators struggle to justify the very significant investment they have to make to transform the network from circuit to packet-based. Their focus is also on how to address incremental revenue and services."

Asian markets certainly run the gamut of responses to VoIP. At the opposite end to Japan, Thai authorities responded by arresting 30 people in early October for offering VoIP as an unauthorized service.

No consumer VoIP service is available in Singapore. SingTel's initial foray, via a partnership with U.S.-based SIPphone, has moved slowly. SIPphone CEO Michael Robertson, who founded dot-com company MP3.com, said at the April launch that the service would have a similar impact on the voice market as his previous venture had on the music market.

However, although initially targeted at Asian service providers, its end-users today are all in North America. Richard Tan, vice president of SingTel's international carrier services, sees limited prospects for consumer VoIP in Singapore.

Cannibalizing core revenue

What's brought VoIP to center stage right now? Hardcore hobbyists were making Internet voice calls a decade ago. Internet or packet-based voice has been running in trunk backbones for four or five years now. IP wholesaler iBasis estimates that a third of all international voice minutes are now carried by IP. Likewise IP voice over corporate VPNs or PBXs is not new either.

VoIP for the mass market, or consumer VoIP, or broadband telephony, is the first big broadband application after pure high-speed access; ironic perhaps, that the telcos' much sought after killer app for broadband is one that cannibalizes their core revenues.

The availability of broadband has given the impetus for viral PC-based applications such as Amsterdam-based Skype and Voglo from the U.S. Skype CEO Niklas Zennstrom was also the co-creator of the Kazaa file sharing software, which is the all-time most popular Internet download.

UK research firm Analysys calls Skype and Voglo "PVAs"--private VoIP applications--and estimates they could take as much as 13% of the residential wireline voice market in Europe by 2007. By that time, in the worst-case scenario, incumbents could lose as much as 3.3 billion euros in subscription revenues a year, Analysys suggests.

From one perspective, services like Skype, Voglo and Vonage make for tough competitors. Says Main: "The beauty of their approach is there is no risk for the user. But it's not clear yet how much impact it has had, and how much revenue it is going to gain."

Skype's strategy in Asia is more akin to a portal play than that of a telecom service provider, leveraging its strength as a PC-based application, capable of offering instant messaging and file-sharing.

The downside is that a PC-based, proprietary system hardly matches the traditional phone for simplicity and convenience.