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Summary:

While proponents of VoIP had long promised a decade of creative destruction, they themselves appear to have become the victims. By tying their fortunes to the whimsy of the incumbent local exchange carriers, many of the upstarts have suffered, destroying billions of dollars in shareholder value in the process.

[qi:090] “VoIP is dead,” Skype General Manager of Voice and Video Jonathan Christensen declared at an industry conference a few weeks ago. He spoke figuratively, of course, but he may well have been right. While Voice-Over-Internet Protocol proponents had long promised a decade of creative destruction, they themselves appear to have become the victims.

The full potential of a technology is not always realized once it converges with market forces. In this case, the gravitational pull of the incumbent local exchange carriers (ILECs) has always proven difficult to resist. Most of the VoIP industry, while loudly proclaiming the SIP era as the beginning of the end for monopoly communications, secretly courted the incumbents in hopes of profiting from replacing their long-amortized investments in the fixed-line business. By tying their fortunes to the whimsy of the ILECs, many of the upstarts suffered, destroying billions of dollars in shareholder value in the process.

Recently PulverMedia, which spurred the VoIP crowd and rode its financial crest, shut its doors amid a swirl of controversy. As of this writing, Sonus Networks, once a high flier at $95 per share in 2000, trades at about $2.29. Even Cisco has thrown in the towel, discontinuing its BTS series of softswitches (which provide the routing logic for VoIP networks). These dismal stories perfectly mirror the ride of the VoIP industry in general.

The outlook was once a lot better.  In 1999, with the ratification of the SIP protocol specification by the IETF, advocates who wanted to tear apart the monopolies that dominated telecom started to beat their war drums.  Following conventional wisdom that the Internet democratizes and deleverages any market into which it enters, it was easy to convince investors to pour billions into VoIP products and companies.  Regulators seemed to support that theory, too, sealing the deal with the FCC’s so-called “Pulver Order,” which defended the VoIP industry from over-reaching regulation and tarifing.

The anticipated period of “creative destruction” came, all right. It began in 2001 with the smiting of the competitive local exchange carriers (CLECs) and long-distance competitors, who had not yet even had time to embrace VoIP, by predatory pricing from the incumbents.  It continued with the shift from fixed voice lines to wireless phones, as evidenced by the drop in landlines . More recently, the guns have been turned toward the VoIP equipment vendors that begat the revolution in the first place.

So what happened? What clipped the wings of so many VoIP hopefuls can be boiled down to five things:

  • Death by Deliberation: The incumbents and cablecos were identified as early targets for the equipment vendors, however their engineers quibbled about curbside protocols and QOS and fiddled with VoIP in the labs, delaying launches by years — far outside of the fundraising cycle of most of the VoIP startups.
  • Competition Attrition: The implosion and autopsy of WorldCom signaled to most of the industry that being a competitor in telecom is not a healthy business. Those high prices were largely arbitrary, and as soon as the market pressured incumbents to reduce them, they did.
  • Evolution vs. Revolution: Companies like Nortel, Siemens and Ericsson rank among the top VoIP equipment vendors today, not startups. Technologists completely underestimated the sway and leverage that the traditional vendors held over their customers.
  • SIP in a Box: SIP might be an open protocol, but networks were built proprietarily and have not been bridged together. Most telecom services still communicate with each other via public switching, meaning that the wonderful possibilities that SIP might enable are limited by the capabilities of the plain old telephone system.
  • Landline Decline: Even as networks were evolving, the number of landlines around the globe was shrinking. People found more convenient ways to communicate via wireless, SMS, instant messaging or pervasive email.
  • VoIP technology has clearly been successful in making inroads into traditional telecom networks, but in doing so, the revolution that SIP in particular, and VoIP in general, enables has been largely cast aside and the entire industry has coalesced in a race to the bottom. With this revolution went the volume of equipment and software sales that could have revitalized the supplier business and stimulated more innovation.

    Of course, while the telecom industry was eating itself alive, a plucky little company from Luxembourg called Skype delivered on VoIP’s promise by almost completely ignoring the Public Switched Telephone Network, not to mention the pundits and experts that cling desperately to SIP’s potential. The point of Christensen’s superpoke at what’s left of the telecom business is that Skype has been successful because it threw away the playbook, ignoring the obsessions of so-called telecom experts and focusing instead on solving the practical needs of everyday users.

    Tens of millions of people use Skype’s network today for text messaging, file-sharing, videoconferencing — and, yes, voice calling. All of these services are made decidedly more convenient because of presence — you can see who’s there before you contact them and use that information to choose what the most appropriate means of communication should be. And with less than a $40 million investment (prior to eBay’s rather more substantial buy-in), Skype’s user growth has outpaced the entire rest of the consumer VoIP business combined.

    The bottleneck for innovation appears to have been Alexander Graham Bell’s (no relation) PTSN — the plain old telephone system. By going after low-hanging fruit and forcing their innovations to be defined within the walls of the PSTN, the vast majority of VoIP companies voluntarily muzzled their own revolution and ultimately cost their investors billions.

    Ian Andrew Bell is a reformed telecom executive, and creator of the team management service rosterbot.com

    This article also appeared on Businessweek.com.

    1. What about the fact that skype was free? and that there’s almost no way to make money off giving a service for free?

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    2. Great analysis. Thanks a lot.

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    3. I stated many times that VoIP is now “telephony” (I already said this during VON 2006). “Normal” people don’t care of what’s behind the scenes, just want to make phone calls. And Skype is a powerful application to communicate with each other, call it VoIP or XYZ, people don’t really care. When you watch a TV channel do you care what kind of technology is used to make it available to you?

      Anyway, very good points.

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    4. Fine, but what is the way ahead and what the early VoIP adopters should do now?

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    5. I couldn’t agree more with Luca.

      The question is always: “Who has the pain?” Skype enables me to call colleagues abroad for free. It saves my company a lot of money. And that is great.

      But it doesn’t enable me to do anything I wasn’t able to do before. If all you do is enable people to do what they could do before, but do it for free (or much less), then you have a problem. You want to be able to enable people to do MORE than they could do before, not just (more or less) the same at a lower cost point. MORE is usually connected to something you can charge somebody for.

      @Vijay

      I don’t see what VOIP can do MORE.

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    6. Hi.

      Yep Luca is correct, Having been selling voip to the enterprise market since late 90’s. 99% of endusers don’t care even 1% what the technology is, Just that it works. And it has to be as simple as plugging a normal phone into a Pots line. Some have got it that simple and they also dont even call it voip, They will be the survivors. Ones who make the big deal on the technology will whither and die.

      Ian

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    7. What can VoIP do more? Allow us to become our own phone company. The real promise is VoIP as a product, but so far the main focus has been a service provider model. Till then it will feel like VoIP is a failure.

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    8. I had no idea there were even moves to make regular phones work over the internet. Perhaps that’s not good but to me VOIP has pretty much always meant Skype and that in itself must be telling.

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    10. Dave Burstein Monday, November 3, 2008

      Ian
      I wish you were totally mistaken. Unfortunately, you’re on target.db

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