12 months ago we wrote about how voice over IP (VoIP) traffic growth was soaring, with the expectation that 2009 could well be the year that the potential of the IP telephony market was fully realised – that with all the investment in next-generation networks we would reach some sort of tipping point. It seemed as if VoIP was an unstoppable force.
In 2009, the picture was not so straightforward as one might have thought: a year of global economic turmoil has had its impact on telecoms investment. The PSTN is still very much alive and well – carriers still interconnect VoIP calls through traditional TDM networks, a process which requires that VoIP calls be depacketised and then repacketised to cross the TDM portion of the connection. The carrier IP telephony market contracted more than 25% in the first quarter of 2009, according to research company Dell’Oro Group, through a combination of reduction in capital spend and decline of fixed voice revenues and subscribers as consumers increasingly choose wireless. Dell’Oro Group director Alan Weckel commented in August 2009: “…We anticipate a degree of vendor volatility that will cause many customers to stay on the sidelines for a longer period of time than we would expect if downward pressure was coming only from the weakened economy. Also, as customers look to alleviate budget constraints, IP line growth will slow in the short term, putting additional downward pressure on the market. In the current environment, some customers will hold on to existing analogue and digital lines for a longer period of time.”
Low barrier to entry
But barriers to entry are low: there are companies who advertise on the internet for VoIP resellers with the promise that anyone can form their own phone company in no time at all for as little as $199. At the other end of the spectrum Skype carried around 33 billion minutes of international voice calls in 2008, or around 8% of all international voice traffic, according to market researcher Telegeography. The researcher also says that Skype is now the largest provider of cross-border voice communications in the world. Similarly Dollarphone has annual sales of over $200 million and has its own fibre-optic network that spans the US and Canada, Phonetime connects to over 200 carriers around the world for which it originated and delivered more than 3.5 billion minutes of long-distance traffic in 2007.
According to Christian Michaud, senior vice president, product marketing, at Tata Communications, the presence of VoIP companies is overwhelmingly positive for the market. Tata is one of the world’s largest wholesale voice providers, having carried about 23 billion international voice minutes in 2007, 11 billion of which were VoIP. It has 1,600 carrier customers, and deals with 785 mobile operators and 700 VoIP providers. Says Michaud: “I wouldn’t call it an explosion at the retail level, but numbers are growing – it’s very easy to download the software and set up in business.”
The presence of such companies is overwhelmingly positive, says Michaud, and he concurs with many others in the industry that VoIP is growing the size of the overall pie. “It’s generating traffic that would not otherwise exist, and not cannibalising PSTN traffic,” he says, “we see it in the same way as IM minutes, it’s generating on-net minutes that wouldn’t have otherwise existed. On the negative side, of course it does have some impact on the PSTN of course, but our evaluation is that it’s mostly new traffic. We see the market growing, it’s more of a benefit than a negative.” Michaud says that Tata’s on-net traffic is growing at a respectable rate. And it’s this market growth that Tata has positioned itself to take advantage of – the company markets itself hard as a one-stop shop for voice solutions, launching in late 2009 a Voice Peering Solution, which enables direct voice traffic exchange between providers and provides easy access to Tata’s network, including the choice to use any type of interconnection.
Competing on price
One effect of this increase in numbers of VoIP suppliers, coupled with a contraction in growth rates, is that many companies now compete on price – and if price is the only differentiator in a market where prices are falling all the time, then there will be some fall-out. Add to this the high cost of acquiring customers – heavy marketing is needed, and it is very hard to build customer loyalty if you are just competing on price – and the picture is not a pretty one.
Brussels-based Voxbone is a wholesale provider of VoIP services which runs a VoIP backbone distributed around multiple PoPs with three aggregation super PoPs in Belgium, New York and Hong Kong. It provides its carrier, call centre and major enterprise customers with direct-inward dial and toll-free numbers, so they can establish a presence in countries where they have no presence. In 2009 it extended its service so that its customers could receive locally-dialled calls from 48 countries around the world including Brazil, Bulgaria, El Salvador, Estonia, Latvia, Lithuania, Pakistan, Peru, Puerto Rico and the US. Its business has grown 60% in the last 12 months and it does business with up to 1,200 resellers. CEO and co-founder Rod Ullins comments: “The combination of VoIP and open source has greatly lowered the barrier to become a global communication provider. Combined with the worldwide reach of the internet, it has become possible to serve customers worldwide from day one, which was impossible in the past. Distance is no longer relevant. When using VoIP, it costs about the same amount to call a US number whether you are in Europe, in Asia, in south America or in Africa. Initially, the main driver for VoIP was cheaper prices. However, this is no longer the case since the prices for voice calls have come down so much. There are lots of companies active in the ‘cheap calling’ space and indeed this market is too crowded and only the strongest ones will survive.”
Ullins says that the trick is to build a business offering other types of enhanced services – for example, it deals with a customer that has a business helping students to learn a foreign language. Learnosity allows language students around the world to connect affordably with their teachers and each other. The Learnosity platform and hosted applications have been deployed so far in major governmental education projects in Ireland and Australia. In practice, students dial in on Voxbone numbers, enter their student IDs, and meet fellow students of their subject language on conference calls, where they conduct assigned role-playing conversations. Teachers subsequently grade these conversations through a Web interface.
Ullins adds: “The whole telephone network is still on the PSTN, for example we still interconnect with BT in TDM, it has not evolved. There are lots of smaller companies because the barriers to entry are so low – they won’t all disappear overnight, but they must target ethnic groups or specialise in other ways, by type of customer or by getting close to the customer.” He says that it’s difficult sometimes to compete as a smaller player, because “telecoms is a closed environment”. “Telcos traditionally manage their infrastructure and assets but are not good at innovating and delivering new features – We’ve always strived to act as an internet company and create a company that mixes what is best of both.”
French VoIP wholesaler Longphone has built its business by delivering services to Africa, and chief executive officer Eytan Cohen explains that the company has a focus on high quality routes and is interconnected with over 50 carriers. The PTTs, in his experience, are either selling retail minutes or handing their international voice business over to company like Belgacom ICS or Tata. A company like his has a lot to offer, he says, “carriers were coming to us when we set up – they were interested in buying from Longphone” and can be highly influential in opening up emerging markets, because of the relatively low costs involved.
Jumping through hoops
Cohen says: “We have two business units, one selling white-label services to call-shop providers and a dedicated business offering premium wholesale voice termination to Africa.” 28% of the company’s customers are located in sub-Saharan Africa while 40% of its minutes are distributed in the region, says Cohen. Customers include Digiphone on the Ivory Coast, which has over 70 call shops, and the Democratic Republic of Congo’s Interface group, which has joined up with Longphone to set up a network of call shops in areas not served by ADSL. Each shop is equipped with a VSAT antenna, and interconnected in VoIP on the satellite link.
In western markets like its home French market, Longphone is concentrating on going deeper into PTT networks in order to get closer to customers, and here Cohen highlights a difficulty for VoIP suppliers and for smaller carriers in general: doing business with larger carriers and PTTs. He says: “We find that when we knock on the door of the large carriers we have to jump through more than a couple of hoops. The average time it has taken me to connect is eight months and the longest it has taken is two years. I don’t know what their motivation is, maybe they’re not very serious about doing business with us.”
Voxbone’s Ullins also points out that the price of traditional telephony is becoming so low that it is becoming harder for VoIP players to compete on price. And while VoIP specialist wholesalers and resellers may be differentiating themselves through reach and customer knowledge, traditional telcos have not been ignoring voice over IP.
Competition from traditional telcos
Says John Bosnell, Point Topic senior analyst: “More and more incumbents and ISPs are entering the VoIP market for defensive reasons (my competitors are doing it) and/or to be able to offer a triple play of video, broadband internet and voice. This increasing competition is pushing down margins and making the long-term future for VoIP-only players look uncertain unless they are able to target niche markets like small enterprise.”
Former RBOCs like AT&T and Verizon already have voice, video, data and internet plays and are offering bundled services with VoIP as an add-on. Cable companies similarly already have video and data/internet plays, and are offering VoIP/voice as an add-on to their service bundles.
Bosnell also highlights the issue of deregulation. Voice over IP is still illegal in some parts of the world. He divides the telecoms world into the mainly occidental world of deregulated voice, and the rest of the world – emerging market economies in parts of Asia, south America and Africa, where deregulation is not as evolved.
It’s a world that is changing rapidly, he says: “Some countries want to prove they are evolving and deregulate, bringing more services to the end user.” But he cautions that because licences are a potential large source of revenue to government they can be used to effectively prevent competition. In India for instance, VoIP has been allowed – in the face of opposition from traditional telcos – but it is hampered by regulation which negates its impact on consumers.
So where will the VoIP market be by the end of 2010? The chances are that it will be made up of a different selection of influencers than are active at the moment. The pure-play VoIP market will inevitably consolidate as companies realise that it becomes impossible to compete on price alone, facilities-based operators and cable companies will continue to gain ground by adding a VoIP service to their bundled offering. VoIP resellers and wholesalers will have to refine their businesses, through new services and pushing closer to their customers – and it will continue to be a force in undeveloped markets.
Mobile VoIP
VoIP players say that they are only just scratching the surface of mobile voice over IP, and a number of them say they plan to work with mobile operators and launch a mobile VoIP service in 2010.
Researcher In-Stat published a report Mobile VoIP-Transforming the Future of Wireless Voice in September 2009. Counting mobile VoIP as VoIP services delivered by mobile service providers or over-the-top application service providers to 3G or 4G devices, the research firm projects subscribers to grow from less than 10 million in 2009 to almost 300 million in 2013. This represents an increase in penetration from single digits in 2009 to 25% of the over 1.1 billion mobile broadband subscribers in 2013. Mobile VoIP still poses a direct threat to operator voice revenue, it also represents a new capability that promises numerous applications. In-Stat projects that by 2013 mobile VoIP applications will generate annual revenues of $32.2 billion, driven by over 278 million registered users worldwide.
How big is VoIP?
According to Point Topic, VoIP is strong in markets which have traditionally had high conventional telephony costs. The US VoIP market has overtaken Japan as the world’s largest in the last couple of years, and growth here been mainly driven by the cable TV operators offering triple-play packages. New York-based Cablevision was one of the pioneers and had a 731,000 subscriber base at the end of 2005. This had grown to 1.7 million by Q2 2008. But the real powerhouse has been Comcast, which grew from 1.8 million subscribers at the end of 2005 to 5.6 million by Q2 2008, according to Point Topic. Cox Communications grew its subscriber base from 1.8 million to 3.1 million in the same period.
Yahoo Broadband is the leading Japanese IP telephony provider, thanks to its own national broadband network, says Point Topic. France remains the leading market in Europe for VoIP, with 11.1 million VoIP subscribers by Q2 2008, up from 6.6 million subscribers at the end of 2006. Germany, Italy, the UK and the Netherlands have all seen strong growth over the past three to four years and this seems likely to continue, according to Point Topic. Between them the four countries had 13.6 million subscribers at Q2 2008. Telegeography says that the end of 2004, only 1.9 million VoIP lines were in service, equivalent to just over 1% of European households. By the end of 2008, VoIP subscribers had grown to 34.6 million lines, accounting for 21% of households. VoIP subscribers accounted for 24% of aggregate (switched and VoIP) residential fixed-line subscribers and 10% of revenues from residential fixed lines in 2008, says Telegeography
