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Summary:

Maybe it’s too soon for the good news to show up on Covad’s bottom line, but a report out today from In-Stat should cheer Covad strategists, since it claims that hosted Voice over IP services “will continue to experience dynamic growth over the next few years,” […]

Maybe it’s too soon for the good news to show up on Covad’s bottom line, but a report out today from In-Stat should cheer Covad strategists, since it claims that hosted Voice over IP services “will continue to experience dynamic growth over the next few years,” reaching the $2 billion mark by 2010.

Studies are studies, and it’s easy to point the graph up and to the right when you don’t have to close the sale. But there does seem to be a kernel of sense in the idea that very small businesses — In-Stat calls 20- to 50-seat deployments the sweet spot — would turn to an outsourced or hosted VoIP model, rather than looking for in-house expertise, software and infrastructure.

While Covad CEO Charlie Hoffman said earlier this year that VoIP overall and for small-biz specifically “isn’t yet at that hockey-stick growth phase,” he did say that small businesses are historically underserved, even though they represent a big part of the overall economic pie. And as providers add more functionality (like the fax-over-IP feature that Packet8 announced at CES), it sounds reasonable that small businesses looking to add functionality to their phones or lower their telephony costs would look first at a hosted VoIP model.

By Paul Kapustka

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  1. I wouldn’t bet too much money on these numbers. They see a revenue of 666 dollar per year per phone or 55 dollar per month per phone in a company. (3 million managed voip phones doing 2 billion dollar a year) I have a tough time believing htis.

    A little comparison. Our friends at Verizon make 75billion a year of 140 million landlines. That comes down to 535 dollar per landline per year. But they have to make that money by offering mobile telephony, internet, T1′s etc etc so it’s not completely fair divide the one over the other. However it does give an idea of how the game is played. Verizon has a 140 million landlines and despite all the other things its doing it can only squeeze 535 out of a line.

    I really wonder if this business is going to be this good. Every mom and pop outfit can enter this market. Most of the revenue is from per minute charges and that is declining. In Europe French telecom operators are making a profit on 30 euro a month triple play with unlimited national and international calls and 28mbit internet and TV. Therefore voice cannot be a big revenue generator and it must be cheap to run. In a competitve market prices will have to come down.

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  2. Raindeer, you are not digging deep enough here. It is no good using Verizon’s gross revenues, because as you pointed out they include many things other than PBX-type services. Managed business phone service is a premium service and a much different game than residential. That said, $55/seat strikes me as pretty pricey for a competitive service. Still, they are probably within the correct order of magnitude, which isn’t bad for a projection going 3-4 years out.

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  3. @Jesse
    I just used those numbers to show how hard it is to make money of a line and probably of a seat. That is also why I combined them with the triple play stats from France to show a current lower limit.

    There is no such thing as a premium service in the VoIP world. There are basically three elements to managed VoIP pricing.
    1. There is the cost per minute to do interconnection to other networks, but we’re moving to No Party Pays and ever lower costs per minute. Since there is generally no real financial limitation on people to call in an SME, you can assume that the amount of time they speak has maxed and will remain kind of fixed. Conclusion lower prices, fixed quantities. Prices will go down, revenues will go down.
    2. There is the cost of owning and operating a bulk of hardware called switches and servers etc. Fact is: That stuff is getting cheaper by the year. There are also more and more engineers on the market who understand VoIP, with ever easier management tools and ever more automagic management. Marginal cost of adding a customer is going down too. Conclusion: Prices are going down.
    3. New advanced features, inventing them and selling them. The biggest error in this business is that people will pay more when they get more. As we all know that just isn’t reality. The marginal cost of new cool things is close to zero per customer. So even if companies might price it somewhere at first, in the end the cost of such a feature will go towards zero. It is as such not advanced to be able to manage your number plan online, to do advanced redirects, to do conference calls adn it doesn’t cost any real money to be able to set it up. So there is also no reason to pay extra for it.

    If you want to see where this market is heading, look at the webhosting market. Even if you forget the smallest players with crappy quality. There is a slew of professional parties to work with. All of them offer advanced features and management software. The coolest is probably Amazon at this moment with its utility model, but there are no high margins in that business.

    So where do I guess that the market will be in about 5 to 10 years? It will be at the 5-15 dollar per phone point per month. So lets all be happy if the market hits 540 million dollar/year.

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  4. Agreed. My point is that only being off by a few hundred percent — $15 vs. $55 — is very good for this type of extrapolation. People with some experience in reading these studies know that they are completely worthless from a real-world perspective. The target audience for them are lazy journalists and pointy-haired bosses.

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  5. Jose Carlos Brenner Thursday, January 11, 2007

    Interesting perspective. However, what’s missing here are the APPLICATIONS. This is were the market is heading. Just look at some of the companies that are offering value add to “dial tone”. For example, Five9 in the call center space offers hosted call center applications and charges $170 per seat per month (this space alone is projected to be over $1.5B in the next few years). I agree that Dial tone by itself is eroding year over year. But, when you look at hosted applications for VoIP this is a monster of an opportunity.

    JCB

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